There is practically no dearth of public and free skateparks – every city, however small seem to have one. I was surprised to see one in the town of Lahaina in Maui. There are enough public skateparks to the extent that I feel resources are being diverted to one kind of outdoor entertainment. According to SkatePark.org, in 2011 alone cities across Unites States added 845,205 sq. ft of skatepark. (That is decent sized homes for 845 people.)

Is there a market for private skatepark that charges (gasp) for skating? It turns out yes and many different parks are doing so. And they do that by starting with — wait for it — customer segmentation.

They are targeting customers who are turned off by public skateparks – those who feel the public skateparks are too crowded and infested with “snot-nosed punks”.

“It’s guys getting away from their wives and kids.”

And by offering this segment a differentiated product the private skateparks are able to charge for it.

They charge dues and maintenance fees that allow members—most of whom are over 30—to ride in a controlled environment free of the nonpaying skaters, scooters and Rollerbladers who clog up public skateparks.
Members pay a $500 initiation fee in addition to $80 a month in dues

It is true that presence of free options takes away large portion of user base but it does not mean you will only succeed by also giving away your product for free or lowering your prices as close to free as possible. Competing against free starts with customer segmentation and not by seeing the entire market as your target segment.

Every skater in the park is not your customer. Stop doing market size estimates based on billions of users. Nor should a marketer resort to simply getting skaters to skate in ones skatepark for free with the hope of monetizing them later.

Rings a bell?

Find those segments whose needs are not served well by the free options, find what they value and willing to pay for and offer them a product with compelling value proposition.

Saying we can’t compete against free shows you have not done your segmentation right.

Starting with free to get everyone’s attention with the hope for monetizing later is just that, hope, not marketing strategy.

The default runner is a man. It is free (and the game is free as well)

But take a look at upgrades that require to collect or buy coins (either way you expend effort or money as per freemium model). So if you want to choose a female runner you have to first collect 5000 coins (by running the man) or pay for it.

I see this as bad price discrimination – purely s a pricing practitioner as well as a dad. But …

My eight year old daughter, who has become a fan of the game, believes it isn’t so. She argues it merely says you have to pay more to be a girl because girls are superior.

If you want to use Wifi at Pete’s Coffee & Tea you will have to buy something first. At the counter they give you a code to use, that allows you about an hour of surfing time.

In many local coffee stores you technically have to buy something but once you do, you can stay parked in their tables for hours without buying anything. In Pete’s bigger competitor, Starbucks coffee, it is the similar unlimited free access plus access to premium extras like The Wall Street Journal.

Coffee shops complain about those who occupy tables for hours at a stretch, buy little or nothing and mooch on their bandwidth as well as electricity. Customers who do spend money at coffee shop and need good connectivity for an hour or two complain about the poor speed and difficulty in finding tables near outlets. General customers (who hire the coffee shop for, coffee) complain about the crowd and lack of seats to simply sit and enjoy their brew or have a conversation.

Free Wifi became a popular perk for coffee shops, restaurants and hotels to attract customers and keep them in their shops. If the customers chose your business over others because of free Wifi, you win. If the customers stay because of free wifi and continue to spend during their stay, you win. You have successfully used free wifi as lead generation tactic and customer retention tool. (Freemium?). For instance, Panera bread saw its sales increase by 15% when they introduced free wifi.

On the other hand, what is free to customers, is not so to businesses. There are costs of operation (making sure there is enough capacity) and opportunity costs (both for the money spent on their big pipe broadband and the moochers). When everyone else offers free wifi it becomes difficult for a business to either stop offering it or start charging for it. Add to this customer dissatisfaction from providing poor internet service.

Look at where we are in the discussion. We are not talking about the compelling value proposition a coffee shop (or a restaurant) offers but talking about a perk. Let us not forget the primary job these businesses wanted customers to hire them for. If customers’ choice is made based on secondary and tertiary factors, the primary value proposition has become irrelevant. If a business fears their customers will walk next door for free wifi they are admitting that their product is an easily replaceable commodity.

That is a bigger problem they ignore while fretting about wifi costs. In focusing on free wifi as lead-gen activity they ignored the core customer segment they started with and the customer jobs they hoped to serve. While some may call free wifi (and Freemium?) as business model innovation, this is essentially losing sight of customer needs and your core competence.

If the customers didn’t hire your coffee shop for coffee, should you tie your business model to selling coffee? That is an incongruence between value creation and value capture.

On the other hand your strategy – to serve the most amazing coffee – need not be fixed. You can see the customer shift and decide your strategy is to serve those customers who have a connectivity need and are not satisfied with existing alternatives. You recognize customer issues with poor speeds in free wifi places and provide reliable speeds as differentiated feature. In such a case you cease being a coffee shop and become a workspace provider. And guess what, you now can charge for that value delivered.

The business model is back in sync with value capture matched to value creation.

“You don’t have to pay for coffee or tea or cookies. You should pay for time, and time costs — I hope — [are] not that expensive.”

And their target segment? Students and business folks who hire them for connectivity and hence pay for the value they get. Nicely done. However, I think they fixed one mistake but introduced another – making coffee free. There really is no reason for them to offer free coffee, especially the premium kind they claim they deliver,

We have cappuccino, latte, espresso, Americano, and our coffee is not the cheap one

They are committing the flip side of free wifi at coffee shop mistake. Sooner or later they will run into the free wifi problem in reverse. Why bother with coffee or why not charge for it? Especially if the customers didn’t hire you for coffee?

When it comes to business strategy, starting with customer needs and choosing the ones that you can serve better than others remains the best approach. And when it comes to business models, charging for value you deliver remains the simplest of all approaches.

The other book with free in its title is by Saul J. Berman, “Not for Free: Revenue Strategies for a New World”. By new world Saul refers to the current business world that drank the kool-aid of previous book or obsessed with monetization model innovations.

And I recommend this book.

Saul isn’t as popular or a household name as Chris Anderson is, although a WSJ reported asked me, “who is Chris Anderson?”, when she was interviewing me on my GigaOm freemium article. This book has just 4 reviews on Amazon (all 5 stars, likely his colleagues?) compared to Chris’ book that has 170 reviews.

Chris Anderson’s book talked about the abundance of computing power, abundance of bandwidth etc and how these forces led to a marginal cost of $0 which naturally means $0 price. Saul starts with those same trends disrupting business models and comes to a different conclusion – how important it is to have a differentiated revenue strategy in order to not let these forces drive your business to dust.

The first step in Saul’s revenue strategy roadmap? Segmentation (chapter 1 in the book):

traditional segmentation approaches are at best correlative—they take an identifiable characteristic and match it with a likely behavior. Why be so indirect? Why not look directly for the behaviors relevant to your industry? Doing so can reveal when consumers are well served with an existing business model and when consumers would be open to new ways of doing things, especially for incumbents.

In other words start with the customer needs or the jobs they are hiring a product for and not whether they are in 25-35 demographics.

This alone is worth the price of the book. What are you waiting for? Go get now – Not For Free

You gave away your product for free, betting on other ways of monetizing your users. Sooner or later you realize that the promise of other revenue streams do not materialize. Your free users remain freeloaders. The success stories reported in tech blogs turn out to be the lucky ones and even among those it is highly likely they succeeded despite freemium not because of freemium. Like I wrote in my last article in GigaOm you too recognize freemium has run its course.

You decide to charge for what you used to give away for free. How can your free product make the successful transition to fee, overcoming user backlash?

First let us look at categories of free. One, products that we have come to expect to be free and feel entitled to getting these free. Two, products that we used to pay for but became free or products we see as optional.

Free as mom’s love: Entitlement Category

Probably entitlement is the wrong word to use given the political times but examples will make it clear. To see a classic example of this let us go back 70 years and revisit a service that was started during World War II.

During World War II, the Red Cross had comfort stations for soldiers overseas, with free coffee and free doughnuts. Then, in 1942, the Red Cross started charging for the doughnuts.

Charging for coffee and doughnuts touched a nerve in soldiers and made them hold a grudge against Red Cross that lasts even today (among veterans). It did not matter that the Red Cross was forced to charge for free coffee by the Government or that repealed the policy soon. The ill-will and grudge continued.

Present day examples in the entitlement category are email, twitter and facebook. Charging for these is very much like your mom charging you for Thanks Giving dinner. Placing a price tag on these will bring significant long-lasting backlash as American Red Cross found by charging veterans for doughnuts. According to Uri Simonsohn, professor at Wharton School of business,

we expect this category of products to be free like mom’s love is.

In a recent GigaOm article, Mathew Ingram explored the question of for-pay version of twitter. What makes a for-pay twitter unthinkable and impractical is how the users have grown accustomed to see it as entitlement. Even enterprise customers who do not think twice to pay $15 per user for Chatter Plus, will not accept a for-pay twitter.

The best solution for getting out of entitlement trap is not to get into one in the first place. This requires constant reminder to your users about the dollar value of the product or service they get it for free. Perfect example of this avoidance is Amazon’s free shipping for orders worth $25 or more. Amazon by default selects the for-pay option making customers explicitly change to free shipping. In addition Amazon always adds the shipping charge then subtracts it from the total to show the dollar value of the service they deliver.

If your product is firmly stuck in the entitlement category you have only one option to move to for-pay model – target a different segment, preferably the one with budget to pay. For instance, secure, reliable email service for businesses vs. just plain old email for personal use.

Returning to Mathew’s for-pay twitter example, the service as it exists today, serving general population, does not have a path from free to fee.

Free as in free lunch

Fortunately, the second category is the most common one for news sites and webapps we now get for free. If these products need not have been free but were made free due to various reasons (mainly the failure to understand customer segment, needs and the value add).

The challenge is the user backlash from being asked to pay for something they did not have to. We have seen such outcries when airlines decided to charge baggage fee, when Ning decided to move to for-pay model and when Times erected pay wall. The good news is this is not as insurmountable as the entitlement trap.

Four years ago I was knee-deep in unbundled pricing. I was looking for ways to unlock value by charging for extras and do so as a strategy without being seen as nickel and diming the customers. The answer I found then was what economists call as reference price. It is the price we used to pay for a product regardless of the value we get. Any increase over reference price causes us pain and any decrease is seen as a gain. The added challenge with free is the reference price of $0. Since the users did not pay even a token amount the move from $0 takes extra work.

As it turns out, reference price is not a fixed number etched in our minds. It is malleable and yields well to behavioral nudges. One such nudge is introducing a super-premium version at even higher price when you move from free to fee. Another nudge is using cost argument to justify the move.

If your startup is stuck in free and want to move to for-pay version, make sure the free was never seen as entitlement and start with moving the reference price. The best option is not to start with free at all if your product indeed adds compelling value to your customers.

Google is getting into ISP business with its Google fiber offering. There are several relevant questions about this attempt by a business whose core competence is in organizing world’s information. There are questions about the pricing strategy, cost structure and whether they have the operational wherewithal to pull this off against others whose core competence is in running a network.

Here let us look at one specific topic – their Free version. Some will see this as significant evidence supporting freemium model. It is anything but a case for freemium. Let us take a closer look at this free version.

The service is available in one city that is likely not the one with hunger for high-speed internet. This in essence is a test market and what they offer here has nothing to do with what they will eventually offer in other markets.

The Free internet is technically not free. Customers either pay $300 upfront or pay $25 a month.

The $300 price is labeled as construction fee which is waived for other premium versions. That is a clever presentation for two reasons. First, the $300 is a high upfront cost for any customer and even more so for someone attracted to free. Right there it limits the most price sensitive customers from opting for this. Second, by explicitly waiving this cost for other two versions, those who choose Free are made to think they are losing out on this value. Pain from this foregone value will push most to opt for the higher priced versions.

Free is also not free forever, customers who pay the upfront fee will get free service for 7 years. This limits the liability for Google and sets clear expectation among customers. It is likely that most customers who would choose this option do not stay in the same house for 7 years. If they did stay, they are less likely to switch to another ISP because of sunk cost bias. In essence Google captured upfront value and locked away these customers for up to 7 years, making them unavailable to others.

There is indeed an option to pay-off the $300 fee over twelve months which will help reduce the barrier for some. Prospect theory suggests that paying $25 a month for twelve months will cause more pain than single payment of $300. So even fewer customers are likely to chose the installment option.

Netting it out, this free is not the run of the mill Chris Anderson school of free. There is a well defined segmentation strategy with carefully crafted free used as a tactic to support it.